Higher Levels Of Information Asymmetry Research Articles

CORPORATE GOVERNANCE IN THE STATE-OWNED BANKS

In the article, based on application of agency theory, the specifics of corporate governance in state-owned banks are highlighted. It is determined that the key distinction of state-owned banks is the fact that a state simultaneously can act as an owner, manager, creditor and regulator. The differences of corporate relations in state-owned banks such as the more complicated multilevel system of agency relations, the higher level of information asymmetry and risk of agent’s opportunism, the another character of trust manifestation are substantiated. It is highlighted that the presence of complicated corporate relations causes the following risks: the state as an agent of population may be ineffective and use the state-owned banks not so for ensuring of socio-economic development, as for financing the state’s projects or state-owned enterprises; in the case of certain political forces’ impact on the formation of the government the state-owned banks activities may be subordinated by motives of certain politicians, interested in using of state-owned banks for achieving their own political goals; the ineffective multi-level delegation of management, monitoring and regulation functions can lead to inefficiencies of state-owned banks in general; the lobbying of state-owned banks’ interests may lead to the breach of competitive environment of financial market, manipulation of movement of credit and investment resources etc. The hypotheses, regarding to the factors that can be decisive for the effective corporate governance in the state-owned banks, are formulated. As main factors which may determine the efficiency of corporate governance in the state-owned banks are considered follow: the structure and composition of agency contracts of management in the state-owned banks, level of banking regulator independence and character of its relations with state-owned banks and other government structures; the formation of supervisory boards, taking into account the absence of political engagement of supervisory boards, the appropriate level of professionalism and reputation, the presence of independent members, the application other procedures for the selection of state-owned banks managers, based on the balance of all stakeholders’ interests; the appropriate balanced level of transparency.

Facebook posting activity and the selective amplification of earnings disclosures

This study examines the determinants of Facebook activity levels with a particular focus on Facebook activity around earnings announcements. Facebook activity is generally higher for firms with higher levels of analyst following, individual ownership, and trading volume, indicating that it is responsive to investor demand effects. Facebook activity also increases around earnings announcements, with the increase being largely attributable to posts containing earnings news. In general, therefore, firms use Facebook posts to amplify earnings news. Such activity is selective, however; it is lower for firms with high levels of information asymmetry, for firms reporting earnings that exactly meet the consensus analyst forecast amount, and when the earnings news is negative but the accompanying price movement is positive. Hence, firms appear to use Facebook to manage the level of attention paid to earnings news.

Foreign Institutional Ownership and the Choice between Public and Private Debt

ABSTRACTThe objective of this study is to examine the role of foreign institutional investors (FIIs) in firms' choice of debt. Using a large sample of firms from 40 countries, we find that FIIs are positively associated with the propensity of firms to access the public debt market and the subsequent issuance of new public debt. In contrast, we find no relationship between domestic institutional ownership and public debt. Our results are robust to various specifications, including a 2SLS regression model, a change model, a Heckman two-stage model and propensity score matching model, and a quasi-natural experiment using the exogenous relaxation of foreign equity restrictiveness. Cross-sectional tests further show that findings are stronger for firms with poorer accruals quality, with higher levels of information asymmetry, and firms domiciled in countries with weaker creditor protection. Collectively, our findings suggest that FIIs play a vital role in facilitating firms' public debt financing.

Health Care in America: The Relationship Between Subjective and Objective Assessments of Hospitals

ABSTRACT: Measuring public service performance is a central issue for modern governments. Less attention, however, has been paid to the similarities and differences between various performance indicators. In particular, we know less about the views of citizens concerning performance and how they are correlated with administrative performance. Examining the growing area of health care, we examine how patient perceptions on service quality are related to a series of objective hospital performance indicators. Regarding the quality of interpersonal care and the process of care, we find convergent validity with patient satisfaction and this validity is relatively consistent across diagnosis types. Patient assessments, however, do not track clinical outcomes, such as mortality. Given the complex context and high levels of information asymmetry in health care, the evidence for convergent validity contributes to the generalizability of the theory linking citizen satisfaction to the provision of public services.

Are venture capital and buyout backed IPOs any different?

This paper addresses differences in the long and short run performance of Initial Public Offerings (IPOs) that are either backed by venture capital or by buyout sponsors. We investigate both the operating and the stock market performance of a sample of 851 U.S. IPOs during 2000 to 2014. Our results reveal significant short and long run performance differences. IPOs backed by venture capital sponsors are significantly more underpriced in the short run. We suggest that this is due to higher levels of information asymmetry. In the long run, return on assets as well as operating margins suggest that buyout backed IPOs outperform those backed by venture capital. However, we do not find significant differences in the risk-adjusted market performance using the Fama-French model. This suggests that buyout backed companies’ post listing operating performance improvements are well contained in the initial listing prices. Our results are not driven by selection effects, i.e. they are not due to the fact that buyout funds select different portfolio companies as compared to venture capital funds.

What’s Really in a Deal? Evidence from Textual Analysis

Using a sample of 814 transcripts from 2011 to 2018, we examine information within merger and acquisition conference calls. Textual analysis reveals significant differences between the content of M&A call transcripts and both contemporaneous corporate press releases and prior earnings conference calls. We find participation of target executive types in M&A calls occurs more frequently in diversifying acquisitions and is related to payment choice consistent with promoting managerial sector specific skills and incentive alignment, respectively. Retention of participating target executives is associated with a negative market reaction. We also identify a negative relation between textual sentiment and market reaction consistent with a response to higher levels of information asymmetry. Greater quantitative information, however, is positively related to the market reaction of M&A calls. We develop targeted M&A motive dictionaries to identify financial and strategic content within call transcripts. Consistent with prior literature on merger motivation, deals with more finance (strategy) oriented words have a higher (lower) market reaction. Overall, our results show that deal-related textual analysis explains a highly significant and economically important component of gains/losses to acquirers.

Data Mining in Evaluating the Impact of Perceived Trust in the Consumption of Safe Foods in Vietnamese Households: The Case of Vegetables in Hanoi

Food safety is as much of a concern to Vietnamese citizens as it is to the public authorities. As safe vegetables are classified as credence goods, the markets of which exhibit a high level of information asymmetry between the buyers and the suppliers. As such, making the market for safe vegetables become more transparent and grow sustainably is a must, but not an easy task. In this paper, we use a Kernel regression method to discover the main determinants of consumers’ decisions for the consumption of “safe” vegetables with more focus on perceived levels of trust. The result shows that apart from other traditional factors, perceived trust is an important determinant of consumers’ decisions. However, the data shows that consumers put more trust in un-verified factors such as “store’s reputation” or “label” and much less on formal factors such as “government certificates”. This result raises some alarm as other studies show that without trusted involvement from the Government, signals from suppliers, such as labeling are not reliable.

Zero-revenue IPOs

Information-based models of the IPO decision suggest that going public before having generated revenues is inefficient. Still, 15% of firms going public in Europe have not reported revenues prior to the IPO. This paper investigates why these firms decide to conduct an IPO and examines whether the absence of revenues affects the outcomes of this decision. The evidence shows that zero-revenue firms go public to fund investments, mainly in the form of R&D. However, their shares are more underpriced at the IPO and develop less liquid and more volatile aftermarket trading than those of revenue-generating issuers. These effects are driven by firms whose revenue-less status is more persistent, as 18.6% still report no revenues at their three-year IPO anniversary. Also, zero-revenue issuers face a higher risk of being delisted shortly after the IPO. Overall, the evidence indicates that zero-revenue firms go public in an attempt to fund superior growth opportunities, but the high levels of information asymmetry and uncertainty increase the cost of raising capital and the risk of an early delisting.

Proximity to urban centers in mergers and acquisitions

PurposeThe purpose of this paper is to examine the impact firm proximity to financial centers has on announcement returns and time to deal completion for mergers and acquisitions.Design/methodology/approachUsing a data set of merger and acquisition activity from 1986 to 2014, target and acquiring firms are classified as rural or urban based on their geographic proximity to major financial centers. The impact of this proximity on short-term acquisition announcement returns and on the amount of time required to complete the transaction are tested.FindingsMarkets react more favorably to the acquisition of firms headquartered in a rural area, likely due to increased information advantage on the part of the acquiring firm. Furthermore, the acquisition of a rural firm requires greater time to completion.Practical implicationsAcquiring firms may be able to use information asymmetry to their advantage when acquiring firms located in a more rural setting with higher levels of information asymmetry. However, this requires the acquiring firm to generate an informational advantage and will also require a greater time commitment on average to complete the deal.Originality/valueWhile prior literature has demonstrated that the distance between target and acquirer can affect acquisition returns and time to deal completion, this study adds to the literature by demonstrating that the geographic location of the target firm relative to major financial hubs can have a unique effect on mergers and acquisitions as well.

Seasoned equity offerings and customer–supplier relationships

Abstract We investigate how seasoned equity offerings (SEOs) by issuers with large customers affect both trading partners’ market values and the relationship's health. We hypothesize that SEOs reveal adverse information about an issuer's major customers and find that issuers and their large customers experience negative returns on SEO announcements. These results are more pronounced when customers have higher levels of information asymmetry and when customer-supplier relationships are particularly important. Large customers of issuers experience larger declines in post-SEO sales, operating performance, and credit ratings than large customers of non-issuers. Also, SEO issuer sales to large customers and relationship duration significantly decline.

Do the FASB's Standards Add Shareholder Value?

ABSTRACT We examine the cost-effectiveness, from the shareholders' perspective, of the accounting standards issued by the FASB during 1973–2009. We evaluate (1) the stock market reactions of firms affected by the standards surrounding events that changed the standard's probability of issuance; and (2) whether the market reactions are related, in the cross-section, to agency problems, information asymmetry, proprietary costs, contracting costs, and changes in estimation risk. The average standard is a non-event from the investors' perspective because 104 of the 138 standards examined are associated with no change in shareholder value. Nineteen (15) standards are associated with a decrease (increase) in shareholder value. Surprisingly, 25 standards are associated with an increase in estimation risk. In the cross-section, firms with higher levels of information asymmetry, lower contracting costs, and a decrease in estimation risk experience most positive returns.

Whether the Hybrid and Public Venture Capital Funds are the First Investors of Young Innovative Companies?

The paper deals with the issues of investment of hybrid and public venture capital funds. The results show that hybrid and public venture capital funds in Latvia in most cases are the first investors. Only a smaller part of these investments are investments of the early stages of funding. The results of our research suggest that venture capital funds with public participation avoid projects with a high level of information asymmetry. The consequence of this can be underfunding of young innovative companies with the potential for rapid growth, which, in turn, is not consistent with the goals of public subsidies of venture capital funds in the context of the need to stimulate innovative economic development.

Structure of Demand and Supply of Investments of State-Subsidized Venture Capital Funds in Latvia

One of the tools for financing young innovative companies is state-subsidized venture capital funds (VCF). The paper explores the issues of demand for investment and the structure of Latvian state-subsidized VCF investments. We found that of the total number of applications for investment received by state-subsidized VCFs, only 42.5% come from innovative companies. The number of innovative companies that received investment from state-subsidized VCFs is even lower and amounts to 32.9%; moreover, of the total number of investments, 28.2% were made in young and innovative companies. The volume of VCF investments in innovative companies amounts to 29.6% of the total amount of investments made. The reason for such a low share of financing for innovative companies from state-subsidized VCFs may be a low demand for VCF investment from innovative Latvian companies and VCFs’ unwillingness to invest funds in companies with a high level of information asymmetry or to have more than 15-20 companies in the portfolio of small funds, since this increases the administrative costs of managing VCFs.

Foreign investor trading and information asymmetry: evidence from a leading emerging market

ABSTRACTThis article examines the influence of foreign investor trading on information asymmetry in the Korean stock market, a representative emerging market characterized by a high level of information asymmetry between corporate insiders and outsiders, and among investors. We find a significantly positive relationship between foreign investor trading and the consequent bid–ask spread – the latter of which is considered as a proxy for the degree of information asymmetry – on both daily and weekly bases. Our results indicate that active foreign investor trading tends to exacerbate informational variation.

Management discretion and the role of the stock market in goodwill impairment decisions - evidence from Finland

IAS 36 provides latitude to management in the impairment testing of goodwill assets, which may intensify agency conflict. In this study, we carry out an empirical analysis on goodwill impairment losses recognised by Finnish listed companies between 2005 and 2009. We document evidence that a change of CEO is associated with a goodwill write-off. Further, our results indicate that the size of a goodwill impairment loss is larger when the company's reported earnings would have been negative in the absence of the impairment charge, which points towards behaviour associated with earnings bath. However, we also report evidence that the monitoring function of the stock market may reduce asymmetric information concerning the carrying value of goodwill. These results suggest that regulators could benefit from focusing on monitoring compliance with the current goodwill accounting standards in firms which exhibit high levels of information asymmetry between investors and management.

Behaviour of Informed and Uninformed Investors: Ex-Ante Uncertainty vs. Signalling Theory

In this paper, we investigate the stock price behaviour of newly listed companies on the stock exchange market with an extremely high level of information asymmetry. We show a unique mechanism of how informed investors influence the stock prices before entering the market to consume abnormal returns. We point out that weak entry regulation and low disclosure requirements, which are implemented by regulators to meet the needs of small and young companies in gaining capital, together with weak legal enforcement, in reality, encourage market participants to overvalue stock prices in the short-term before debut and squeeze out aftermarket uninformed investors.

Equity Market Competition and Stock Price Crash Risk

This study investigates the impact of equity market competition on stock price crash risk. Higher levels of equity market competition lead to a faster incorporation of information into stock prices, so that the amount of information that is at any time impounded into prices is greater. I find that equity market competition reduces the effectiveness of bad news hiding and is associated with a reduced likelihood of crashes. Additional tests show that the importance of equity market competition is concentrated in firms with higher levels of information asymmetry and during high-sentiment periods and provide further support for this hypothesis.

The Need for Design in Health Systems

A case for government intervention can be made where it can be argued that either there is market failure or that a market based solution even though efficient is not optimal according to the government’s definition of welfare. The provision of healthcare faces many problems of market failure and welfare loss that are accentuated by the fact the consequences of low quality healthcare can seriously impair the quality of life, and are often irreversible and sometimes even life-threatening. In healthcare there are a number of distortions present that make the idealised view of markets a difficult one to sustain. These include: (a) lack-of-knowledge of one’s own health; (b) consequent upon this, a high level of price elasticity in the primary healthcare domain, when the disease is at an early stage, and a low level for secondary and tertiary care, when the illness is considerably advanced; (c) a number of behavioural issues which influence health seeking behaviours; (d) a high level of information asymmetry between the provider and the patient; (e) relatively primitive state of the art in medicine itself combined with rapid changes; and (f) high volatility in healthcare expenditures at the level of the individual. Given these issues, countries have struggled to devise solutions to develop well-functioning health systems within the limits of their internal capacities to finance and govern these systems. In order to ensure that the Health System that is chosen by a country has a good design and uses its governmental and other resources in an optimal manner, it becomes important to first study it carefully and to only then develop choices for policy makers. There are a number of frameworks that facilitate this study and suggest that it is indeed possible to arrive at feasible designs even in highly resource constrained settings.

News announcement effects of compliance with section 404 of SOX: Evidence from non-accelerated filers

This study examines the effects of Section 404 of the Sarbanes–Oxley Act of 2002 (SOX) news announcements on a non-accelerated filer's levels of information asymmetry proxied by bid–ask spread. We find that, on average, the information asymmetry decreases (increases) after the announcements of compliance (deferral of compliance) with Section 404 of SOX. While a deferral announcement delays incurring the cost of compliance with Section 404, it signals lack of disclosure of relevant price sensitive information about the effectiveness of internal control systems, leading to higher levels of information asymmetry. Consistently, we find that, on average, prices increase (decrease) in response to the announcements signaling compliance (deferral of compliance) with Section 404 of SOX. Additionally, the results from cross-sectional analyses of abnormal returns indicate that changes in information asymmetry are priced by investors, whereas firm-specific estimates of cost of compliance with Section 404 do not appear to play a significant role in securities.

Disclosure practices of foreign and domestic firms in Australia

Even while straddling the global economy, multinational corporations (MNCs) need to adapt to different institutional regimes in host country markets in which they operate. This research examines the extent to which MNC-subsidiaries are embedded in their local institutional context in terms of how they pursue local legitimacy and respond to local laws and standards of disclosure of executive remuneration in the host country. Drawing attention to key socio-economic influences on foreign MNC-subsidiaries, we examine whether global MNCs respond to disclosure requirements in a host country and address a higher level of information asymmetry associated with multinational operations. The analysis of disclosure levels of MNC-subsidiaries vis-à-vis domestic firms suggests that, other things being equal, MNCs are more responsive to increased disclosure requirements than their local counterparts if they have substantial economic interactions with domestic product-markets. These results demonstrate that MNCs are willing to incur the marginal cost of increasing disclosure if commensurate benefits justify it. Another interesting finding relates to the negative association between legal system type (common law) of MNC's parent country and disclosure level of director and executive remuneration. It highlights that MNC-subsidiaries with higher regulatory (institutional) distance disclose better level of remuneration to gain external legitimacy and reduce their liability of foreignness.